Table of Contents

Contents Pages
Introduction-------------------------------------------------------------------------1

Topic& Body-----------------------------------------------------------------------1-4

References----------------------------------------------------------------------------4
 Introduction

The way a business is organized influences its ability to reach its goals and objectives. The
below information focuses on various forms of business organizations that are widely used
across the World. These include sole Proprietorships, Partnerships, and Corporations

Advantages and Disadvantages of Sole Proprietorship, Partnership, and Cooperation

Sole Proprietorship/Advantages and Disadvantages

The sole proprietorship is a common organization form especially used by small businesses. A
sole proprietorship is a business that is owned and operated by a single individual. Most sole
proprietorships are family-owned businesses. The advantages of the sole proprietorship
organization include:

1. It is easy and inexpensive to form and operate administratively (simplicity);

2. It offers the maximum managerial control; and
3. Business income is taxed to the owner as ordinary (personal) income.

The disadvantages of the sole proprietorship include:

1. It is difficult to raise large amounts of capital;

2. There is an unlimited liability;
3. It is difficult to transfer ownership; and
4. The company has a limited life linked to the owner’s life.

Sole proprietorships are typically organized informally and require relatively little paperwork to
begin operations. It is the simplest among the alternative business organizations to understand
and use. To begin operation, the individual declares himself/herself to be a business. In many
cases, a license will be required to operate the business, but often the business begins simply by
“opening its door.” The day-to-day operations of the firm are also organized informally and may
be administered as the owner desires, subject to legal and tax restrictions. For example, certain
taxes must be paid by specific dates. The vast majority of regulations small businesses face are
independent of the legal form of the business. Metrics such as business size, the number of
employees, and location determine which regulations business face.

Sole proprietorships are subject to unlimited liability which means that the liability for business
debts extends beyond the owner’s investment in the firm. For example, if the sole proprietorship
is unable to cover its debts and obligations, creditors have the right to collect personal assets that
are not part of the business or other businesses of the owner. The owner may be forced to
liquidate assets, such as a personal savings account, a vacation home, or other personal assets
just to cover the firm’s obligations.

Another disadvantage of a sole proprietorship is that it has a limited life that corresponds to the
life of the owner. The owner may sell assets from the business to another sole proprietorship or
business. However, if the business is not terminated prior to the death of the owner, then after the
proprietor’s death, the assets remaining in the firm will be distributed according to the owner’s
will or comparable instrument. When the owner dies, the business is terminated.

Partnership /Advantages and Disadvantages

A general partnership is a business that is owned and operated by two or more individuals. The
partners contribute to the business, share in the management, and divide any profit. Partnerships
are usually created by written contracts among the partners, but they can be legally recognized
even without a written agreement. If the partnership owns real property, the partnership
agreement should be filed in the county where the property is located.

Advantages of partnerships include:

1. They are easy and inexpensive to form and operate administratively;

2. They have the potential for large managerial control;
3. Business income is taxed as ordinary (personal) income to the owner; and
4. A partnership may be able to raise larger amounts of capital than a sole proprietorship.

The disadvantages of a general partnership include:

1. Raising capital can still be a constraint;

2. There is an unlimited liability;
3. It is difficult to transfer ownership; and
4. The company has a limited life.

The advantages and disadvantages of a general partnership are similar to a sole proprietorship.
Partnerships are generally easy and inexpensive to set up and operate administratively.
Partnership operating agreements are critical. Like sole proprietorships, profit allocated to the
partners is based upon their share in the business.

Managerial control resides with the partners. This feature can be an advantage or disadvantage
depending on how well the partners work together and the level of trust in each other. Control by
any one partner is naturally diluted as the number of partners increases. Partnerships are separate
legal entities that can contract in their own name and hold title to assets

Unlimited liability remains a strong disadvantage for a general partnership. All partners are liable
for the debts of the firm. Due to this unlimited liability, the risks of the business may be spread
according to the owners’ equity rather than according to their interests in the business. This risk
becomes an obligation whenever the partners cannot satisfy their shares of the business’s
obligations.

Cooperation /Advantages and Disadvantages

A corporation is a legal entity separate from the owners and managers of the firm. Three
fundamental characteristics distinguish corporations from proprietorships and partnerships: (1)
the way they are owned and managed, (2) their perpetual life, and (3) their legal status separate
from their owners and managers.

A corporation can own property, sue and be sued, contract to buy and sell, and be fined—all in
its own name. The owners usually cannot be made to pay any debts of the corporation. Their
liability is limited to the amount of money they have paid or promised to pay into the
corporation.

Ownership in the corporation is represented by small claims (shares) on the equity and profit
stream of the firm.

The advantages of a C corporation include:

1. There is a limited liability;

2. The corporation has unlimited life;

3. Ownership is easily transferred; and

4. It may be possible to raise large amounts of capital.

The disadvantages of a C corporation include:

1. There is double taxation; and

2. It is expensive and complicated to begin operations and administer.

One of the primary strengths of the corporate form of business organization is that most of the
owners of the firm (shareholders) can lose what they have invested in the firm. This limited
liability feature means that as a shareholder, one’s personal assets beyond the investment in the
corporation can’t be taken to satisfy the corporation’s debts or obligations.

Ownership can easily be transferred by selling shares in the corporation. Likewise, the
corporation has an unlimited life because when an owner dies, the ownership shares are passed to
his/her heirs. The common separation of ownership and management in large corporations helps
to ease the ownership transfer as the firm management process never ceases.

Corporations are more expensive and complicated to set up and administer than sole
proprietorships or partnerships. Corporations require a charter, must be governed by a board of
directors, pay legal fees, and meet certain accounting requirements. Despite the relatively high
setup cost, the primary disadvantage of the corporate form of business is that income generated
by the corporation is subject to double taxation.

References

Google Scholar 

 Robison, L. (2020). Alternative Forms of Business Organizations. Financial Management

for Small Businesses.